The 20% Myth — and What's Actually Required

The idea that you must save 20% before buying a home stops many first-time buyers before they even start. The truth is that 20% is a threshold, not a floor. It's the point at which most conventional loan programs drop the requirement for private mortgage insurance (PMI) — but plenty of buyers close on homes with far less saved.

Here's a quick look at the real minimums by loan type:

  • Conventional loans: Some programs allow as little as 3% down for qualifying first-time buyers.
  • FHA loans: Backed by the Federal Housing Administration, these require 3.5% down with a credit score of 580 or above.
  • VA loans: Available to eligible veterans and active-duty service members — often require 0% down.
  • USDA loans: For eligible rural and suburban properties — also can offer 0% down for qualifying buyers.

For a side-by-side comparison of how these loan programs work, see our overview of loan types open to first-time buyers.

Don't Drain Your Savings Entirely

It can be tempting to put every available dollar toward a down payment to reduce your loan balance, but keeping cash reserves matters. Closing costs, moving expenses, and early home repairs can add up quickly. Most financial professionals suggest maintaining an emergency fund even after you close — gutting it for a larger down payment can leave you financially exposed in the first months of homeownership.

What PMI Is and When It Applies

If you put down less than 20% on a conventional loan, your lender will almost certainly require private mortgage insurance (PMI). PMI is a monthly premium added to your mortgage payment that protects the lender — not you — in case you stop making payments.

PMI typically costs between 0.5% and 1.5% of your original loan amount per year, divided into monthly installments. On a $300,000 loan, that could add $125 to $375 per month to your payment. The exact rate depends on your credit score, loan size, and down payment amount.

The important upside: PMI is not permanent. Under the Homeowners Protection Act, lenders are required to cancel PMI automatically once your loan balance reaches 78% of the original purchase price — meaning you've built 22% equity. You can also request cancellation once you reach 20% equity, provided your payment history is in good standing.

FHA vs. Conventional Mortgage Insurance: A Key Difference

Conventional PMI can be canceled once you reach 20% equity, but FHA mortgage insurance premiums (MIP) often last the full loan term if your initial down payment was less than 10%. Some buyers refinance out of an FHA loan into a conventional loan once they've built sufficient equity to eliminate MIP. This decision involves trade-offs — consult a licensed mortgage professional before making any changes to your loan.

FHA loans work differently: they carry a mortgage insurance premium (MIP) that may last the life of the loan depending on your down payment amount and loan term. This is one reason some buyers weigh the trade-offs carefully between FHA and conventional financing.

How Down Payment Size Changes Your Monthly Cost

Your down payment directly shapes how much you borrow, which in turn determines your monthly principal and interest payment. A larger down payment also reduces the total interest you pay over the full loan term — often by tens of thousands of dollars on a 30-year mortgage.

3%

Minimum down payment on some conventional loans

Certain conventional loan programs backed by Fannie Mae and Freddie Mac allow qualifying first-time buyers to put down as little as 3%.

2%–5%

Typical closing cost range as a share of purchase price

Closing costs are separate from the down payment and must also be available at the time of purchase; these include lender fees, title insurance, and prepaid expenses.

78%

LTV threshold for automatic PMI cancellation

Under the Homeowners Protection Act, lenders must automatically cancel PMI on conventional loans once the loan balance drops to 78% of the original purchase price.

Beyond the loan balance, your down payment affects:

  • PMI: As covered above, less than 20% down typically triggers this added monthly cost on conventional loans.
  • Loan-to-value ratio (LTV): A lower LTV can qualify you for better interest rates with some lenders.
  • Cash reserves: Whatever you don't put toward the down payment stays in your pocket — important when you consider closing costs (typically 2%–5% of the purchase price) and emergency repairs after move-in.

Before committing to a number, it helps to understand how your mortgage payment is calculated. Our article on mortgage basics walks through principal, interest, and amortization in plain terms.

Where Down Payment Assistance Fits In

If the savings target feels out of reach, you're not limited to going it alone. Down payment assistance (DPA) programs are offered by state housing finance agencies, local governments, and some nonprofit organizations. They can come in the form of grants (money you don't repay) or second loans with deferred or low-interest terms.

Eligibility typically depends on income, purchase price limits, the property location, and whether you're a first-time buyer — though the definition of "first-time buyer" is often broader than people expect, sometimes including anyone who hasn't owned a home in the past three years.

The U.S. Department of Housing and Urban Development (HUD) maintains a free directory of HUD-approved housing counselors who can identify programs available in your area and help you understand what you'd qualify for. This is general financial education — for advice tailored to your specific situation, consult a licensed mortgage professional or HUD-approved counselor.

If you're still working on building your savings foundation, our guide on common savings myths addresses misconceptions that often slow people down before they get started.

This article is for general informational and educational purposes only and does not constitute personalized financial, mortgage, or legal advice. Loan programs, eligibility requirements, and terms vary by lender and location. Consult a licensed mortgage professional or HUD-approved housing counselor for guidance specific to your situation.